Depending on the type of entity one part is usually

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Unformatted text preview: should be monitored are: • • • Rationalisation: Excuses that employees will find to justify what they do. Pressure: The pressure employees have to reach profit targets. Opportunity: The chances that employees have to manipulate things. These three areas are key to the level of misrepresentation and fraud within the entity. Managing Risk Now that the risks have been identified, we use control systems such as belief systems, boundary systems and internal control systems to manage this risk. A belief system is something that is explicitly set in the organisation that executives will repeatedly reinforce (usually through mission and vision statements), to provide the entity with purpose and direction. The question that is posed is whether management should directly tell employees what to do and what not to do. A boundary system answers the question. These are usually either business conduct boundary systems or strategic boundary systems. The former is where the entity sets down rules about how to conduct business usually in the form of ethical conduct and company policies. Employees must be sanctioned for violating these. A strategic boundary system is where the entity sets down the types of business opportunities that it should avoid. Employees should also have incentives to comply with these systems. This system addresses rationalisation. Entities should have good internal controls (otherwise known as safeguards) to minimise issues. These are split into three categories: • Structural Safeguards These are physical barriers, which stop, or at least limit, the possibility of fraud. Such examples include the segregation of duties between employees, defining levels of authorisation, physical security on assets (such as locks) and independent audits. Management Accounting 2 – Semester 2 2010 32 Strategic Risk Management • • Systems Safeguards These are controls over information systems to limit errors leading to misrepresentation or fraud opportunities. They include accurate and complete record keeping, restricted access to only required sections and timely reporting to management. Staff Safeguards These are controls designed to limit opportunities for staff to manipulate. They include rotating key positions so that no one employee is there for an extended period of time, ensuring adequate expertise and sufficient resources are provided. Management Accounting 2 – Semester 2 2010 33 Management Control Management Control Background To ensure efficiency and effectiveness in the organisation we can use a variety of methods that generally fall under the two categories of strategic control and corporate governance. Strategic Control Strategic Control is further divided down into information control and behavioural control. In a traditional approach to information control, entities formulate strategies, then implemen...
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